Aggregate Demand and Aggregate Supply Effects of COVID-19: A Real-Time Analysis

30 Pages Posted: 23 Jun 2020

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Eric Engstrom

U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets

Andrey Ermolov

Fordham University - Gabelli School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June, 2020

Abstract

We extract aggregate demand and supply shocks for the US economy from real-time survey data on inflation and real GDP growth using a novel identification scheme. Our approach exploits non-Gaussian features of macroeconomic forecast revisions and imposes minimal theoretical assumptions. After verifying that our results for U.S. post-World War II business cycle fluctuations are largely in line with the prevailing consensus, we proceed to study output and price fluctuations during the COVID-19 pandemic. We attribute two thirds of the decline in 2020:Q1 GDP to a negative shock to aggregate demand. In contrast, regarding the staggeringly large decline in GDP in 2020:Q2, we estimate two thirds of this shock was due to a reduction in aggregate supply. Statistical analysis suggests a slow recovery due to a persistent effects of the supply shock, but surveys suggest a somewhat faster rebound with a recovery in aggregate supply leading the way.

Keywords: Business cycles, COVID-19, Macroeconomic volatility

JEL Classification: E31, E32, E43, E44

Suggested Citation

Bekaert, Geert and Engstrom, Eric C. and Ermolov, Andrey, Aggregate Demand and Aggregate Supply Effects of COVID-19: A Real-Time Analysis (June, 2020). FEDS Working Paper No. 2020-049, Available at SSRN: https://ssrn.com/abstract=3633961 or http://dx.doi.org/10.17016/FEDS.2020.049

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Eric C. Engstrom

U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3044 (Phone)

Andrey Ermolov

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States
9179690060 (Phone)

HOME PAGE: http://faculty.fordham.edu/aermolov1/

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